When does a partnership firm have to deduct tax on payments to suppliers and contractors?

A small partnership firm pays its suppliers in full. As it grows, the Ordinance turns it into a withholding agent: once it becomes a “prescribed person” under section 153, it must deduct income tax from payments for goods, services and contracts, deposit it, and report it every quarter. The trigger for most firms is turnover.

What does the law say?

The duty to deduct. Section 153(1) says every prescribed person making a payment, in full or in part and including an advance, to a resident person:

• (a) for the sale of goods, including toll manufacturing, except where the payment is less than Rs. 75,000 in aggregate during a financial year;
• (b) for rendering or providing services, except where the payment is less than Rs. 30,000 in aggregate during a financial year; or
• (c) on the execution of a contract, other than a contract for goods or services,

shall deduct tax at the time of payment from the gross amount payable, including sales tax, at the rate in Division III of Part III of the First Schedule.

Who is a prescribed person. Section 153(7)(i) lists them. Two entries catch partnership firms:

• Clause (c): an association of persons constituted by, or under law.
• Clause (h): an association of persons having turnover of Rs. 100 million or above in any of the preceding tax years.

Other entries can also apply to a firm, such as clause (j), a person registered under the Sales Tax Act, 1990 with turnover of Rs. 100 million or more in any of the preceding tax years, and clauses (k) and (l) for builders and plot developers.

What else does a prescribed person have to do?

Quarterly statements. Section 165(1) requires every person deducting tax from a payment, which includes deduction under section 153, to furnish a quarterly statement in the prescribed form. It shows each payee’s name, CNIC, NTN and address, the total payments made, and the tax deducted. Under section 165(2) the statements are due:

Quarter ending	Statement due by
30 September	20 October
31 December	20 January
31 March	20 April
30 June	20 July

A proviso says the statement must be filed “even where no withholding tax is collected or deducted during the period”.

Annual statement and reconciliation. Section 165(7) requires an annual statement within thirty days of the end of the tax year. Section 165(8) requires a statement reconciling the annual statement with the return, audited accounts or financial statements, by the due date for filing the return of income.

Worked example (illustrative figures)

Siddiqui Associates, a partnership distributing kitchen appliances in Lahore, had turnover of Rs. 115,000,000 in tax year 2026. It was not constituted under any special law.

1. Tax year 2026 is a preceding tax year for tax year 2027, and turnover in it was Rs. 100 million or more.
2. Under section 153(7)(i)(h), the firm is a prescribed person throughout tax year 2027.
3. In July 2026 it pays a local transporter Rs. 45,000 for deliveries. Services payments exceed Rs. 30,000 in aggregate for the financial year, so the firm deducts tax under section 153(1)(b) at the Division III rate.
4. It buys packing material from one supplier for Rs. 60,000 in total over the year. That is below Rs. 75,000 in aggregate, so section 153(1)(a) requires no deduction on those payments.
5. It files quarterly statements by 20 October 2026, 20 January 2027, 20 April 2027 and 20 July 2027, then the annual statement within thirty days of 30 June 2027.

What if …?

What if the firm fails to deduct? Section 161(1) says a person who fails to deduct tax as required, or deducts it but does not pay it over, is personally liable to pay the amount to the Commissioner, after an opportunity of being heard under section 161(1A). Section 161(2) lets the firm recover that amount from the payee. If the payee has already paid the tax itself, section 161(1B) bars recovery from the firm but charges default surcharge at twelve percent per annum for the period of default.

What if the firm files a statement late? Entry 1A of the Table in section 182(1) sets a penalty of Rs. 50,000 where the tax withheld was paid by its due date and the statement is filed within ninety days of its due date. In all other cases the penalty is Rs. 2,500 for each day of default, with a minimum of Rs. 10,000.

What if the payee has an exemption certificate? Section 153(4) lets the Commissioner, on the payee’s application, allow payment after deduction at a reduced rate, or, for a public limited company, without deduction. The firm would act on the certificate the payee holds.

Common mistakes

• Waiting for the current year’s turnover. Clause (h) looks back at “any of the preceding tax years”.
• Ignoring small aggregates. The Rs. 75,000 and Rs. 30,000 limits are per financial year in aggregate, not per invoice.
• Skipping nil statements. The proviso to section 165(1) requires a statement even when nothing was deducted.
• Deducting on the net amount. Section 153(1) applies to the gross amount payable, including sales tax.

What to check in the official text

Read section 153(1), the definitions in section 153(7), and sub-section (5) for payments outside the section. Read section 165 in full for statement dates, and section 161 for the consequences of not deducting. The rates are in Division III of Part III of the First Schedule; check them in the official PDF, since the site text drops tables. Rent paid by a firm has its own withholding rule, covered on a separate page.